1Q|17 GOVERNMENT PENSION FUND GLOBAL · 2017-04-28 · Apr-16 Jul-16 Jan-17 Apr-17 FTSE Global All Cap (global) S&P 500 (US) ... performers, returning -4.4 percent. Despite ... de

GOVERNMENTPENSION FUNDGLOBAL

1Q|17

QUARTERLY REPORT/2017

First quarter 2017 in brief

The Government Pension Fund Global returned 3.8 percent, or 297 billion kroner, in the first quarter of 2017.

3.8%297 Bn. KR

HIGHLIGHTS

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Equity investments returned 5.5 percent, while fixed-income investments returned 0.8 percent. Investments in unlisted real estate returned 0.6 percent.

The return on the fund’s investments was 0.1 percentage point higher than the return on the benchmark index the fund is measured against.

5.5% 0.6%0.8%

EQUITYINVESTMENTS

FIXED-INCOMEINVESTMENTS

UNLISTED REAL ESTATE

INVESTMENTS

ISSN 1893-4846 (print) | ISSN 1893-5524 (web) | Design: Brandlab | Photo: Getty Images/Allan Davey/unexpected | Production: 07 Media AS | Paper: Galerie Art Matt 250 g / 150 g | Copies: 150

The fund had a market value of 7,867 billion kroner at the end of the quarter and was

invested 64.6 percent in equities, 32.9 percent in fixed income and 2.5 percent

in unlisted real estate.

7 867Bn. KR

2.5%

UNLISTED REAL ESTATE

INVESTMENTS

32.9%

FIXED-INCOMEINVESTMENTS

64.6%

EQUITYINVESTMENTS

Contents

WWW.NBIM.NO Norges Bank Investment Management manages the Government Pension Fund Global.Our mission is to safeguard and build financial wealth for future generations.

INVESTMENTS

Equity investments ________ 6

Fixed-income investments _ 9

Real estate investments ___ 12

MANAGEMENT

Management _____________ 13

Investment risk ___________ 14

Investment and ownership 16

Operational risk ___________ 17

KEY FIGURES AND FINANCIAL REPORTING

Key figures ________________ 18

Financial reporting ________ 21

Notes ____________________ 26

Auditor’s report ___________ 47

1 2 3

Translated from Norwegian. For information only.

InvestmentsEQUITY INVESTMENTSEquity investments returned 5.5 percent and made up 64.6 percent of the fund at the end of the quarter. The return was driven by upbeat expectations in both developed and emerging markets. The US stock market began the year strongly, with the new administration promising deregulation and measures to stimulate growth in the economy. Growth expectations in Europe were positive, and markets in the region rallied. A brighter growth outlook was also a key factor behind returns in emerging markets, which had the strongest returns in the quarter. Commodity prices were stable, and there were positive developments in key markets such as China, India and Brazil.

Strongest return in Asia and OceaniaStocks in Asia and Oceania returned 7.8 percent and made up 21.8 percent of the fund’s equity investments at the end of the quarter. Japanese stocks returned 3.7 percent, or 0.6 percent in local currency, and amounted to 8.8 percent of equity investments.

European stocks produced a return of 5.8 percent and accounted for 35.8 percent of the fund’s equities. The UK, which is the fund’s largest European market with 9.6 percent of its equity investments, returned 3.2 percent, or 3.5 percent in local currency.

North American stocks returned 4.0 percent and made up 39.3 percent of the equity

Chart 1 Price developments in stock sectors in the FTSE Global All Cap Index. Measured in US dollars. Indexed total return 31.12.2016 = 100

Source: FTSE

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Oppdatert: ABS 19.04.2017

Chart 1 Price developments in stock sectors in the FTSE Global All Cap Index. Measured in US dollars. Indexed total return 31.12.2016 = 100

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Technology Health careConsumer goods TelecommunicationsOil and gas

Source: FTSE

Chart 2 Price developments in regional equity markets. Measured in US dollars, except for the Stoxx Europe 600, which is measured in euros. Indexed total return 31.12.2016 = 100

Source: Bloomberg

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Chart 2 Price developments in regional equity markets. Measured in US dollars, except for the Stoxx Europe 600, which is measured in euros. Indexed total return 31.12.2016 = 100

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FTSE Global All Cap (global) S&P 500 (US)Stoxx Europe 600 (Europe) MSCI Asia Pacific (Asia)

Source: Bloomberg

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Investments | 1Q 2017 | Government Pension Fund Global

INVESTMENTS 7

portfolio. US stocks, which were the fund’s single-largest market with 37.2 percent of its equity investments, returned 4.1 percent, or 5.6 percent in local currency.

The Chinese stock market, home to 2.9 percent of the fund’s equity investments, returned 9.4 percent. Emerging markets as a whole accounted for 9.8 percent of the equity portfolio and returned 9.1 percent.

Tech stocks perform best Technology companies produced the highest return in the first quarter at 11.1 percent, with a strong performance in all subsectors. Key drivers included increased demand for

semiconductors from the automotive and manufacturing sectors and further growth in e-commerce, digital marketing and cloud services.

Basic materials stocks returned 7.0 percent, driven mainly by stable commodity prices and investor optimism. A more positive outlook for global growth and infrastructure improvements in both the US and China boosted expectations of higher future revenue in the sector.

Industrials returned 7.0 percent, due to strong returns in engineering, especially industrial robotics and production equipment. Stronger economic data from Japan and Europe and an

Table 1 Return on the fund’s equity investments in first quarter 2017 by sector. Percent

Sector

Return in international

currencyShare of equity

investments1

Financials 4.3 23.8

Industrials 7.0 14.1

Consumer goods 6.8 13.3

Health care 6.9 10.3

Technology 11.1 10.2

Consumer services 4.1 10.1

Oil and gas -4.4 5.8

Basic materials 7.0 5.8

Telecommunications 2.4 3.2

Utilities 6.6 2.9

1 Does not sum up to 100 percent because cash and derivatives are not included.

Table 2 The fund’s largest equity holdings as at 31 March 2017. Millions of kroner

Company Country Holding

Apple Inc US 59,602

Nestlé SA Switzerland 50,012

Royal Dutch Shell Plc UK 41,760

Alphabet Inc US 40,848

Microsoft Corp US 38,547

Roche Holding AG Switzerland 37,207

Novartis AG Switzerland 33,717

Johnson & Johnson US 27,176

Amazon.com Inc US 27,116

BlackRock Inc US 26,513

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expectation of increased investment fuelled investor optimism in the sector. Suppliers to the technology sector also had strong returns.

Oil and gas stocks were the weakest performers, returning -4.4 percent. Despite OPEC’s efforts to limit the supply of oil and keep prices stable around 50 dollars per barrel, the quarter saw US shale oil producers adjusting to permanently lower oil prices through increased efficiency and cost cutting.

Individual stocks The investment in technology company Apple Inc had the strongest positive contribution to the return in the first quarter, followed by

technology company Samsung Electronics Co Ltd and health care company Roche Holding AG. The companies that had the most negative contributions were the oil companies Exxon Mobil Corp, Royal Dutch Shell Plc and Chevron Corp.

The fund participated in 24 initial public offerings in the quarter. The largest was in real estate company Invitation Homes Inc, followed by consumer goods company Becle SAB de CV and real estate company Neinor Homes SA. The offerings in which the fund invested the most were those in Invitation Homes Inc, Becle SAB de CV and consumer services company Sushiro Global Holdings Ltd.

RETURN IN INTERNATIONAL CURRENCYThe fund invests in international securities. Returns are generally measured in international currency – a weighted combination of the currencies in the fund’s benchmark indices for equities and bonds. This currency basket consisted of 34 currencies at the end of the quarter. Unless otherwise stated in the text, results are measured in this currency basket.

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INVESTMENTS 9

FIXED-INCOME INVESTMENTSFixed-income investments returned 0.8 percent and accounted for 32.9 percent of the fund at the end of the first quarter. Global yields were relatively stable during the period.

Positive return on government bondsGovernment bonds returned 1.4 percent and made up 56.2 percent of the fund’s fixed-income investments at the end of the quarter.

US Treasuries returned -0.6 percent, or 0.8 percent in local currency, and accounted for 18.8 percent of fixed-income investments, making them the fund’s largest holding of government debt from a single issuer. The Federal Reserve raised its policy rate in March, but this had already been priced into the market

and so had a limited impact on the return. The dollar weakened somewhat against the fund’s currency basket during the quarter.

Euro-denominated government bonds represented 11.9 percent of the fund’s fixed-income holdings and returned -1.2 percent, or -1.1 percent in local currency. As the market expected, the European Central Bank (ECB) left its policy rate unchanged during the quarter. The announcement in December of a reduction in the ECB’s monthly bond purchases from 80 to 60 billion euros from April, along with uncertainty about the outcome of the presidential and parliamentary elections in France in the second quarter, led to wider yield spreads between countries in the euro area.

Table 4 The fund’s largest bond holdings as at 31 March 2017

Issuer Country

Holding Millions of

kroner

United States of America US 569,123

Japanese government Japan 187,618

Federal Republic of Germany Germany 112,509

Mexican government Mexico 64,284

UK government UK 57,886

French Republic France 56,109

Italian Republic Italy 48,281

South Korean government South Korea 47,945

Spanish government Spain 32,023

Government of India India 31,736

Table 3 Return on the fund’s fixed-income investments in first quarter 2017 by sector. Percent

Sector

Return in international

currency

Share of fixed-income investments1

Government bonds2 1.4 56.2

Government-related bonds2 0.5 13.1

Inflation-linked bonds2 -0.4 5.0

Corporate bonds 0.0 24.0

Securitised bonds -0.1 5.2

1 Does not sum up to 100 percent because cash and derivatives are not included.

2 Governments may issue different types of bonds, and the fund’s investments in these bonds are grouped accordingly. Bonds issued by a country’s government in the country’s own currency are categorised as government bonds. Bonds issued by a country’s government in another country’s currency are government-related bonds. Inflation-linked bonds issued by governments are grouped with inflation-linked bonds.

9

Japanese government bonds amounted to 7.1 percent of the fund’s fixed-income holdings and returned 3.0 percent, or -0.2 percent in local currency. The yen strengthened somewhat against the fund’s currency basket during the quarter.

Government bonds in emerging markets had the strongest return in the quarter. Especially Mexican government bonds had a good quarter and returned 12.1 percent, or 4.0 percent in local currency.

The fund also holds bonds from government-related institutions such as Kreditanstalt für Wiederaufbau, the European Investment Bank and Canada Housing Trust No. 1. These bonds returned 0.5 percent and accounted for 13.1 percent of fixed-income investments.

Corporate bonds returned 0.0 percent and made up 24.0 percent of fixed-income investments at the end of the period. The credit spread on corporate bonds was stable during the quarter. As a large proportion of these bonds are denominated in dollars, the weakening of the dollar pulled down the return measured in the currency basket.

Securitised bonds, consisting mainly of covered bonds denominated in euros, returned -0.1 percent and made up 5.2 percent of fixed-income holdings.

Inflation-linked bonds returned -0.4 percent and accounted for 5.0 percent of total fixed-income investments.

Chart 3 Price developments for bonds issued in dollars, euros, pounds and yen. Measured in local currencies. Indexed total return 31.12.2016 = 100

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Source: Bloomberg Barclays Indices

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Chart 3 Price developments for bonds issued in dollars, euros, pounds and yen. Measured in local currencies. Indexed total return 31.12.2016 = 100


Chart 4 10-year government bond yields. Percent

Source: Bloomberg5


Chart 4 10-year government bond yields. Percent

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INVESTMENTS 11

Changes in fixed-income holdings The market value of investments in bonds denominated in emerging market currencies climbed from 12.4 to 12.8 percent of total fixed-income investments during the quarter, due mainly to an increase in the market value of Mexican bonds as a result of the peso strengthening against the fund’s currency basket.

Investments in dollars, euros, pounds and yen fell from 79.5 to 79.2 percent of fixed-income holdings during the quarter.

The biggest increases in government bond holdings in the first quarter were in Japanese, Mexican and French bonds. The biggest decreases were in bonds from the UK, Germany and the US.

Chart 5 Price developments in fixed-income sectors. Measured in US dollars. Indexed total return 31.12.2016 = 100

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Government bonds Government-related bondsInflation-linked bonds Corporate bondsSecuritised bonds

Source: Bloomberg Barclays Indices6

Chart 5 Price developments in fixed-income sectors. Measured in US dollars. Indexed total return 31.12.2016 = 100



Table 5 The fund’s fixed-income investments as at 31 March 2017 based on credit ratings. Percentage of bond holdings

AAA AA A BBBLower rating Total

Government bonds 25.8 8.4 11.7 6.8 1.5 54.3

Government-related bonds 5.3 5.2 1.5 0.6 0.1 12.6

Inflation-linked bonds 3.8 0.4 0.1 0.4 0.1 4.9

Corporate bonds 0.2 2.4 8.3 11.9 0.4 23.2

Securitised bonds 4.4 0.5 0.1 0.1 0.0 5.0

Total bonds 39.5 17.0 21.6 19.8 2.1 100.0

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REAL ESTATE INVESTMENTS Unlisted real estate investments returned 0.6 percent and amounted to 2.5 percent of the fund at the end of the quarter.

The return on unlisted real estate investments depends on rental income, operating expenses, changes in the value of properties and debt, movements in exchange rates, and transaction costs for property purchases and sales. Measured in local currency, rental income net of operating expenses made a positive contribution of 0.9 percentage point to the return, and changes in the value of properties and debt contributed 0.5 percentage point, while currency movements made a contribution of -0.8 percentage point.

The management mandate for the fund was amended with effect from 1 January 2017. The fund’s real estate investments no longer form part of the strategic benchmark index, which now consists exclusively of equities and bonds. The fund may still invest in real estate, but it is up to Norges Bank to determine the scope and mix of real estate investments within the

general limits in the mandate. The changes to the mandate ensure a holistic approach to managing a portfolio that includes both listed and unlisted investments.

At an operational level, unlisted and listed real estate investments are managed under a combined strategy for real estate. Investments in listed real estate returned -0.7 percent.

Purchases and sales of unlisted real estate announced during the quarter In January, the fund expanded its Regent Street partnership with The Crown Estate. The partnership acquired a 100 percent leasehold interest in 10 Piccadilly, a 98,660 square foot office and retail property in central London. The fund paid 32.2 million pounds, or 334 million kroner, for its 25 percent stake.

Also in January, it was announced that the partnership between Norges Bank Real Estate Management and Prologis Inc had sold three logistics properties in the San Francisco Bay Area. The fund received 38.3 million dollars, or 318.9 million kroner, for its 45 percent stake.

Table 6 Return on the fund’s real estate investments in first quarter 2017

Return

Rental income (percentage points) 0.9

Change in value (percentage points) 0.5

Transaction costs (percentage points) 0.0

Result of currency adjustments (percentage points) -0.8

Unlisted real estate investments (percent) 0.6

Listed real estate investments (percent) -0.7

Aggregated real estate investments (percent) 0.3

Table 7 Market value of real estate investments as at 31 March 2017. Millions of kroner

Holding1

Unlisted real estate investments 193,546

Listed real estate investments 55,087

Aggregated real estate investments 248,633

1 Including bank deposits and other receivables

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MANAGEMENTWe aim to leverage the fund’s long-term outlook and considerable size to generate high returns and safeguard wealth for future generations.

The investment mandate issued by the Ministry of Finance was amended with effect from 1 January 2017. The return on all of the fund’s investments, including real estate, is now measured against a benchmark index from the Ministry of Finance composed of a global equity index based on FTSE Group’s Global All Cap stock index and a global bond index based on various bond indices from Bloomberg Barclays Indices. The benchmark index serves as a general limit for market and currency risk in the management of the fund.

With this new model, it is up to Norges Bank to decide how much to invest in real estate and

what types of property to invest in. Purchases are financed through the sale of equities and bonds, which means that the proportion of the fund invested in equities and bonds will differ from the benchmark index. At an operational level, unlisted and listed real estate investments are managed under a combined strategy for real estate.

The overall return on the fund was 0.1 percentage point higher than the return on the benchmark index in the first quarter, due mainly to a positive relative return on fixed-income investments.

The return on the fund’s equity investments, including listed real estate, was in line with the benchmark, making a contribution of -0.01 percentage point to the fund’s relative return. Excluding listed real estate, the equity portfolio made a positive contribution to the fund’s

Management

Chart 6 The fund’s quarterly return and accumulated annualised return. Percent

Chart 6 The fund’s quarterly return and accumulated annualisedreturn. Percent

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Oppdatert: AMF 190417

Chart 7 The fund’s quarterly relative return and accumulated annualised relative return. Calculations based on aggregated equity and fixed-income investments until end of 2016. Percentage points

Chart 7 The fund’s quarterly relative return and accumulated annualised relative return. Calculations based on aggregated equity and fixed-income investments until end of 2016. Percentage points

Oppdatert: AMF 190417

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MANAGEMENT 13

relative return. Investments in the industrial and the oil and gas sectors made the most positive contributions to the relative return in the first quarter, while health care and financial stocks made the most negative contributions. Broken down by country, Swedish stocks made the most positive contribution to the relative return, while US and Australian stocks made the most negative contributions.

The fund’s fixed-income investments outperformed the benchmark index for bonds by 0.4 percentage point, making a contribution of 0.13 percentage point to the fund’s relative return. The fund’s investments had a higher weight of emerging markets than the benchmark. Falling yields and stronger currencies in emerging markets contributed to the positive relative return. Fixed-income investments had a slightly higher yield than the benchmark in the first quarter.

Unlisted real estate underperformed the fund’s benchmark index, making a contribution to the fund’s relative return of -0.08 percentage point.

We sell specific parts of the equity- and fixed-income portfolios to finance our real estate

investments. Unlisted real estate also underperformed the equities and bonds sold to finance the properties. In addition, the relative result is influenced by an effect from the allocation between asset classes. In the first quarter, this result effect from the allocation between asset classes contributed positively to the fund’s relative return with 0.05 percentage point.

INVESTMENT RISKThe fund’s market risk is determined by the composition of its investments and by movements in share prices, exchange rates, interest rates, property prices and credit risk premiums. As no single measure or analysis can fully capture the fund’s market risk, we use a variety of measures and analyses – including expected volatility, factor exposures, concentration analysis and liquidity risk – to gain the broadest possible picture of this risk.

The fund’s expected absolute volatility, calculated using the statistical measure standard deviation, uses a three-year price history to estimate how much the annual return on the fund’s investments can normally be expected to fluctuate. Expected absolute volatility was 10.9 percent at the end of the first quarter, or about 860 billion kroner, compared with 10.6 percent at the end of 2016. The increase is due mainly to a higher weight of equities in the portfolio.

We invest in real estate to improve the diversification of the overall portfolio. We expect real estate investments to have a different return profile than equities and bonds, both in the short and in the longer term. The relative risk that this entails will impact on calculations of the fund’s expected relative volatility. As daily pricing is not available for our

Table 8 Contributions from asset classes to the fund’s relative return in first quarter 2017. Percentage points

TotalAttributed to exter-

nal management

Equity investments -0.01 0.03

Fixed-income investments 0.13 0.00

Unlisted real estate investments -0.08

Cross-asset allocation 0.05

Total 0.09 0.03

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Management | 1Q 2017 | Government Pension Fund Global

real estate investments, we use a model from MSCI to calculate the risk for the fund’s unlisted real estate investments.

The Ministry of Finance and Norges Bank’s Executive Board have set limits for deviation from the benchmark index in the management of the fund. One of these limits is expected relative volatility, which puts a ceiling on how

much the return on the fund’s investments can be expected to deviate from the return on the benchmark index.

The management mandate for the fund was amended with effect from 1 January 2017. All the fund’s investments, including unlisted real estate investments, are now included in the calculation of expected relative volatility, and

Chart 8 Expected absolute volatility of the fund. Percent (left-hand axis) and billions of kroner (right-hand axis)

Chart 8 Expected absolute volatility of the fund. Percent (left-hand axis) and billions of kroner (right-hand axis)

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Oppdatert: rph, 20170419

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Chart 9 Expected relative volatility of the fund. Basis points Chart 9 Expected relative volatility of the fund. Basis points

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Oppdatert: rph, 20170419

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Table 9 Key figures for the fund’s risk and exposure

Limits set by the Ministry of Finance 31.03.2017

Allocation Equity portfolio 50 - 70 percent of fund's market value1 64.3

Fixed-income portfolio 30 - 50 percent of fund's market value1 34.0

Unlisted real estate no more than 7 percent of fund's market value 2.5

Market risk 1.25 percentage points expected relative volatility for the fund's investments 0.3

Credit risk Maximum 5 percent of fixed-income investments may be rated below BBB- 2.1

Ownership Maximum 10 percent of voting shares in a listed company in the equity portfolio2 9.1

1 Derivatives are represented with their underlying economic exposure.2 Equity investments in listed and unlisted real estate companies are exempt from this restriction.

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MANAGEMENT 15

measured against the fund’s benchmark index, which consists exclusively of equities and bonds indices. The fund’s limit for expected relative volatility, including unlisted real estate, is still at 1.25 percentage points. The actual level, including unlisted real estate, was 0.32 percentage point at the end of the quarter.

The Executive Board has also set a limit for expected shortfall between the return on the fund and the benchmark index. The fund is to be managed in such a way that the expected negative relative return in extreme situations does not exceed 3.75 percentage points. Investments in unlisted real estate is also included in the calculation of expected shortfall for the fund with effect from 1 January 2017. The actual level was 1.36 percentage points at the end of the first quarter.

INVESTMENT AND OWNERSHIP Responsible investment is an integral part of our management of the fund. We have structured this work into three areas: standard setting, ownership and risk management. In the first quarter, we invited NGOs in Norway for a meeting where we presented our work on responsible investment in 2016. Representatives from 26 organisations attended.

Standard setting We submitted a consultation response to the OECD during the quarter on the draft practical guidance for its Guidelines for Multinational Enterprises. The guidance recommends that enterprises conduct due diligence to identify, prevent and mitigate actual and potential adverse impacts from their operations. We expressed our support for the guidance and the companion as useful tools for companies, but also called for greater clarity and closer co-

ordination with other international standards and guidelines in some areas.

We also submitted comments to the Task Force on Climate-related Financial Disclosures set up by the G20-sponsored Financial Stability Board. The development of a general framework for reporting and assessing climate risk is a priority for investors. In December 2016, the task force released its second report with recommendations (Phase II), and we mostly expressed our support for the recommendations in the public consultation. We proposed that the task force considers whether an overarching comply-or-explain principle might help make the framework more universally applicable.

We have been analysing greenhouse gas emissions at portfolio companies since 2014. One challenge in this work is a lack of standardised and comparable data. We therefore stressed that climate-related disclosure in the financial sector, as proposed by the task force, is heavily reliant on adequate reporting in other sectors. We welcome the task force’s recommendations, as they have the potential to result in homogeneous, appropriate and consistent reporting across jurisdictions and, where relevant, across sectors and asset classes.

Ownership We voted at 1,616 general meetings in the first quarter, considering and voting on a total of 13,677 proposals. We aim for regular contact with the boards of our largest holdings and accordingly held 45 meetings with chairmen or other board members on key topics relating to our ownership.

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Management | 1Q 2017 | Government Pension Fund Global

Risk management We continued to work during the quarter on improving our databases of non-financial data on climate change, water management and deforestation. We improved our risk framework for environmental, social and governance issues with updated calculation methods, additional data sources for subsectors, and the introduction of a new parameter at country level. We also began work on integrating assessments of corporate governance and greenhouse gas emissions in the fund’s portfolio of corporate bonds.

Observation and exclusion In March, Norges Bank published its decision to exclude a further 10 companies following assessment against the product-based coal criterion in the guidelines for observation and exclusion. A further two companies were placed under observation. All in all, Norges Bank has excluded 69 companies and placed 13 under observation on the basis of this criterion.

Norges Bank also announced the Executive Board’s decision, in line with a recommendation from the Council on Ethics, to revoke the exclusion of Raytheon Co after the company confirmed to the Council that it is no longer engaged in the production of cluster weapons. The company was excluded from the fund in 2005.

OPERATIONAL RISK Norges Bank’s Executive Board sets limits for operational risk management and internal controls at Norges Bank Investment Management. The Executive Board has decided there must be less than a 20 percent probability that operational risk factors will result in gross losses of 750 million kroner or more over a 12-month period, referred to as the Executive Board’s risk tolerance.

Each quarter, Norges Bank Investment Management estimates the size of the potential losses or gains it may incur over the next year because of unwanted operational events related to its investment management activities. The estimate is based on past events and an assessment of future risks and represents the fund’s estimated operational risk exposure. Estimated operational risk exposure remained within the Executive Board’s tolerance limit in the first quarter. A total of 135 unwanted operational events were registered in the quarter, with an estimated financial impact of 10.3 million kroner.

The Ministry of Finance has issued rules on the fund’s management and is to be informed of any significant breaches of the specified limits. No such breaches were registered during the quarter, and we did not receive any notifications from local supervisory authorities of any significant breaches of market rules or general legislation.

17

MANAGEMENT 17

Key figuresTable 10 Quarterly return

1Q 2017 4Q 2016 3Q 2016 2Q 2016 1Q 2016

Returns in international currency

Return on equity investments (percent) 5.53 4.91 6.03 0.66 -2.90

Return on fixed-income investments (percent) 0.77 -2.35 0.89 2.49 3.32

Return on real estate investments (percent)1 0.62 1.25 2.29 -1.42 -1.29

Return on fund (percent) 3.78 2.17 4.00 1.27 -0.63

Relative return on fund2 (percentage points) 0.09 0.28 0.17 -0.11 -0.18

Management costs (percent) 0.02 0.01 0.01 0.01 0.01

Return on fund after management costs (percent) 3.76 2.15 3.98 1.26 -0.64

Returns in kroner (percent)

Return on equity investments 6.85 8.74 1.54 1.11 -7.14

Return on fixed-income investments 2.03 1.21 -3.39 2.95 -1.19

Return on real estate investments1 1.88 4.95 -2.04 -0.98 -5.60

Return on fund 5.08 5.90 -0.41 1.72 -4.97

1 Return on real estate investments includes exclusively unlisted real estate investments from 2017.2 Relative return on fund includes real estate investments from 01.01.2017. Relative return prior to 2017 is calculated on the

aggregated equity and fixed-income investments.

Table 11 Accumulated return since first capital inflow in 1996. Billions of kroner

1Q 2017 4Q 2016 3Q 2016 2Q 2016 1Q 2016

Return on equity investments 2,404 2,129 1,866 1,650 1,620

Return on fixed-income investments 975 955 1,022 1,004 939

Return on real estate investments1 41 38 37 31 31

Total return 3,420 3,123 2,925 2,685 2,591

1 Includes exclusively unlisted real estate investments from 2017.

18

Key figures and financial reporting | 1Q 2017 | Government Pension Fund Global

Table 12 Historical key figures as at 31 March 2017. Annualised data, measured in the fund’s currency basket

Since 01.01.1998

Last 10 years

Last 5 years

Last 3 years

Last 12 months

Fund return (percent) 5.83 5.48 8.53 6.44 11.66

Relative return on fund1 (percentage points) 0.26 0.06 0.16 -0.02 0.46

Annual price inflation (percent) 1.77 1.78 1.23 1.05 1.88

Annual management costs (percent) 0.09 0.08 0.06 0.06 0.06

Net real return on fund (percent) 3.90 3.55 7.15 5.27 9.54

The fund's actual standard deviation (percent) 7.45 9.06 6.28 6.37 3.73

The fund's tracking error1 (percentage points) 0.70 0.91 0.37 0.37 0.33

The fund's information ratio (IR)1,2 0.39 0.12 0.43 -0.04 1.23

1 Based on aggregated equity and fixed-income investments until end of 2016.2 The fund’s information ratio (IR) is the ratio of the fund’s average monthly relative return to the fund’s tracking error. The IR

indicates how much relative return has been achieved per unit of relative risk.

19

KEY FIGURES AND FINANCIAL REPORTING 19

Table 13 Key figures. Billions of kroner

1Q 2017 4Q 2016 3Q 2016 2Q 2016 1Q 2016

Market value

Market value of equity investments 5,082 4,692 4,317 4,275 4,234

Market value of fixed-income investments 2,592 2,577 2,584 2,681 2,622

Market value of real estate investments1 194 242 218 221 223

Market value of fund2 7,867 7,510 7,118 7,177 7,079

Accrued, not paid, management fees2 -1 -4 -3 -2 -1

Owner's capital2 7,866 7,507 7,116 7,175 7,078

Inflow/withdrawal of capital3 -20 -27 -30 -24 -21

Paid management fees3 -4 0 0 0 -4

Return on fund 297 198 240 94 -85

Changes due to fluctuations in krone 83 221 -269 28 -286

Total change in market value 357 392 -58 98 -396

Changes in value since first capital inflow in 1996

Total inflow of capital 3,375 3,397 3,423 3,452 3,475

Return on fund 3,420 3,123 2,925 2,685 2,591

Management fees4 -36 -35 -34 -33 -32

Changes due to fluctuations in krone 1,108 1,025 804 1,073 1,045

Market value of fund 7,867 7,510 7,118 7,177 7,079

Return after management costs 3,384 3,088 2,891 2,652 2,559

1 Includes exclusively unlisted real estate investments from 2017.2 The fund’s market value shown in this table does not take into account the management fee. Owner’s capital in the financial

statements equals the fund’s market value less accrued, not paid, management fees.3 Paid management fees are specified separately, and not included in Inflow/withdrawal of capital.4 Management costs in subsidiaries, see Table 9.2 in the financial reporting section, are not included in the management fees.

Management costs in subsidiaries have been deducted from the fund’s return before management fees.

20


Financial statements

Income statement _______________________ 22

Balance sheet ____________________________ 23

Statement of cash flows __________________24

Statement of changes in owner’s capital __ 25

Notes

Note 1 General information ___________ 26

Note 2 Accounting policies ____________ 27

Note 3 Returns per asset class _________28

Note 4 Income/expense from Equities and units, Bonds and Financial derivatives _______ 29

Note 5 Holdings of Equities and units, Bonds and Financial derivatives _____________________30

Note 6 Unlisted real estate ____________ 31

Note 7 Fair value measurement _______34

Note 8 Risk ___________________________ 39

Note 9 Management costs ____________45

Auditor

Auditor’s report __________________________47

Financial reporting

21


Income statement

Amounts in NOK million Note 1Q 2017 1Q 2016 2016

Profit/loss on the portfolio before foreign exchange gains and losses

Income/expense from:

- Equities and units 4 274 164 -166 825 342 813

- Bonds 4 19 582 84 478 100 250

- Unlisted real estate 6 2 675 854 6 942

- Financial derivatives 4 930 -3 782 -3 213

- Secured lending 866 915 4 013

- Secured borrowing 45 18 23

Tax expense -1 027 -928 -4 061

Interest income/expense -10 -11 -54

Other costs -3 -11 -40

Profit/loss on the portfolio before foreign exchange gains and losses 297 222 -85 292 446 673

Foreign exchange gains and losses 83 004 -286 146 -306 099

Profit/loss on the portfolio 380 226 -371 438 140 574

Management fee 9 -1 177 -752 -3 731

Profit/loss for the period and total comprehensive income 379 049 -372 190 136 843

22


Balance sheet

Amounts in NOK million Note 31.03.2017 31.12.2016

ASSETS

Deposits in banks 20 738 17 759

Secured lending 187 116 134 338

Cash collateral posted 1 015 2 320

Unsettled trades 51 593 13 196

Equities and units 5 4 614 509 4 373 042

Equities lent 5 444 371 340 865

Bonds 5 2 190 730 2 220 286

Bonds lent 5 490 192 454 735

Unlisted real estate 6 192 028 188 469

Financial derivatives 5 8 327 9 366

Other assets 2 189 1 966

TOTAL ASSETS 8 202 808 7 756 342

LIABILITIES AND OWNER'S CAPITAL

Liabilities

Secured borrowing 253 378 213 520

Cash collateral received 2 283 3 688

Unsettled trades 72 318 22 195

Financial derivatives 5 3 589 4 501

Other liabilities 3 951 1 944

Management fee payable 9 1 177 3 731

Total liabilities 336 696 249 579

Owner's capital 7 866 112 7 506 763

TOTAL LIABILITIES AND OWNER'S CAPITAL 8 202 808 7 756 342

23


Statement of cash flows

Amounts in NOK million, receipt (+) / payment (-)Year-to-date

31.03.2017Year-to-date

31.03.2016 2016

Operating activities

Receipts of dividend from equities and units 22 993 22 589 118 517

Receipts of interest from bonds 19 214 18 666 74 832

Receipts of interest and dividend from unlisted real estate subsidiaries 747 706 3 657

Net receipts of interest and fee from secured lending and borrowing 841 756 4 097

Receipts of interest, dividend and fee from holdings of equities and units, bonds and unlisted real estate 43 795 42 717 201 103

Net cash flow from purchase and sale of equities and units -31 562 -19 267 -72 588

Net cash flow from purchase and sale of bonds 20 530 10 230 -38 151

Net cash flow to/from investments in unlisted real estate subsidiaries -735 -159 -17 269

Net cash flow financial derivatives -1 145 -884 84

Net cash flow cash collateral related to derivative transactions -114 -4 394 983

Net cash flow secured lending and borrowing -5 384 7 325 50 236

Net payment of taxes -2 239 -779 -3 116

Net cash flow related to interest on deposits in banks and bank overdraft -66 -8 -

Net cash flow related to other expenses, other assets and other liabilities 3 089 -4 051 -430

Management fee paid to Norges Bank1 -3 731 -3 933 -3 933

Net cash inflow/outflow from operating activities 22 438 26 797 116 919

Financing activities

Inflow from the Norwegian government2 - - -

Withdrawal by the Norwegian government2 -19 669 -20 552 -100 616

Net cash inflow/outflow from financing activities -19 669 -20 552 -100 616

Net change in cash

Deposits in banks at 1 January 17 759 2 543 2 543

Net increase/decrease of cash in the period 2 769 6 245 16 303

Net foreign exchange gains and losses on cash 210 -1 660 -1 087

Deposits in banks at end of period 20 738 7 128 17 7591 Management fee shown in the Statement of cash flows for a period is the settlement of the fee that was accrued and

expensed in the previous year.

2 Inflows/withdrawals included here only represent transfers that have been settled in the period (cash principle). Inflows/withdrawals in the Statement of changes in owner’s capital are based on accrued inflows/withdrawals.

24


Statement of changes in owner’s capital

Amounts in NOK millionInflows

from ownerRetained earnings

Total owner's capital1

1 January 2016 3 494 640 3 976 580 7 471 220

Total comprehensive income - -372 190 -372 190

Net inflow/withdrawal during the period1 -20 800 - -20 800

31 March 2016 3 473 840 3 604 390 7 078 231

1 April 2016 3 473 840 3 604 390 7 078 231

Total comprehensive income - 509 033 509 033


31 December 2016 3 393 340 4 113 423 7 506 763

1 January 2017 3 393 340 4 113 423 7 506 763

Total comprehensive income - 379 049 379 049


31 March 2017 3 373 640 4 492 472 7 866 1121 In the first quarter of 2017 there was a withdrawal from the krone account of NOK 23.4 billion. Of this, NOK 3.7 billion was

used to pay the accrued management fee for 2016. In the first quarter of 2016, there was a withdrawal from the krone account of NOK 24.7 billion. Of this, NOK 3.9 billion was used to pay the accrued management fee for 2015.

25


Note 1 General Information

1. INTRODUCTIONNorges Bank is Norway’s central bank. The bank manages Norway’s foreign exchange reserves and the Government Pension Fund Global (GPFG).

The GPFG shall support saving to finance future government expenditure and underpin long-term considerations relating to the use of Norway’s petroleum revenues. The Norwegian Parliament has established the legal framework in the Government Pension Fund Act, and the Ministry of Finance has formal responsibility for the fund’s management. The GPFG is managed by Norges Bank on behalf of the Ministry of Finance, in accordance with section 2, second paragraph of the Government Pension Fund Act and the management mandate for the GPFG issued by the Ministry of Finance. The Executive Board of Norges Bank has delegated day-to-day management of the GPFG to the Bank’s asset management area, Norges Bank Investment Management (NBIM).

The Ministry of Finance has placed funds for investment in the GPFG in the form of a

Norwegian krone deposit with Norges Bank (the krone account). Norges Bank manages the krone account in its own name by investing the funds in an investment portfolio consisting of equities, fixed-income securities and real estate. The GPFG is invested in its entirety outside of Norway.

In accordance with the management mandate for the GPFG, transfers are made to and from the krone account. When the Norwegian State’s petroleum revenue exceeds the use of petroleum revenue in the fiscal budget, deposits will be made into the krone account. In the opposite situation, withdrawals will be made. Transfers to and from the krone account lead to a corresponding change in Owner’s Capital.

2. APPROVAL OF THE QUARTERLY FINANCIAL STATEMENTS The quarterly financial statements of Norges Bank for the first quarter of 2017, which only encompass the financial reporting for the GPFG, were approved by the Executive Board on 26 April 2017.

Notes to thefinancial reporting

26


Note 2 Accounting policies

1. BASIS OF PREPARATIONThe regulation concerning the annual financial reporting for Norges Bank, which has been laid down by the Ministry of Finance, requires that Norges Bank’s financial statements shall include the financial reporting for the GPFG, and that these shall be prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU.

Norges Bank prepares quarterly financial statements for the GPFG, with closing dates of 31 March, 30 June and 30 September. The quarterly financial statements are prepared in accordance with IAS 34 Interim Financial Reporting.

The quarterly financial statements are prepared using the same accounting policies and calculation methods as used for 2016. Accounting policies are described in the annual report 2016, and the quarterly financial statements should therefore be read in conjunction with this. No new or amended standards with a significant impact on the financial reporting have been implemented from 1 January 2017.

2. SIGNIFICANT ESTIMATES AND ACCOUNTING JUDGEMENTSThe preparation of the financial statements involves the use of estimates and judgements that may affect assets, liabilities, income and expenses. Estimates and judgements are based on historical experience and expectations about future events that are considered probable at the time the financial statements are presented. Estimates are based on best judgement. However, actual results may deviate from estimates.

In cases where there are particularly uncertain estimates, this is described in the respective notes. For additional information on significant estimates and critical accounting judgements, see the relevant notes in the annual report 2016.

27


Note 3 Returns per asset class

Table 3.1 Returns per asset class

1Q 2017 4Q 2016 3Q 2016 2Q 2016 1Q 2016Year-to-date

31.03.2017

Returns in the fund's currency basket

Return on equity investments (percent) 5.53 4.91 6.03 0.66 -2.90 5.53

Return on fixed-income investments (percent) 0.77 -2.35 0.89 2.49 3.32 0.77

Return on real estate investments1 (percent) 0.62 1.25 2.29 -1.42 -1.29 0.62

Return on fund (percent) 3.78 2.17 4.00 1.27 -0.63 3.78

Relative return on fund2 (percentage points) 0.09 0.28 0.17 -0.11 -0.18 0.09

Returns in Norwegian kroner (percent)

Return on equity investments 6.85 8.74 1.54 1.11 -7.14 6.85

Return on fixed-income investments 2.03 1.21 -3.39 2.95 -1.19 2.03

Return on real estate investments1 1.88 4.95 -2.04 -0.98 -5.60 1.88

Return on fund 5.08 5.90 -0.41 1.72 -4.97 5.081 Return on real estate investments includes exclusively unlisted real estate investments from 2017.2 Relative return on fund includes real estate investments from 01.01.2017. Relative return on fund prior to 2017 is calculated

on the aggregated equity and fixed-income investments.

For additional information on the method used in the return calculation. see note 3 Returns per asset class in the annual report 2016.

28


Note 4 Income/expense from Equities and units, Bonds and Financial derivatives

Tables 4.1 to 4.3 specify the income and expense elements for Equities and units, Bonds and Financial derivatives, where the line

Income/expense shows the amount recognised in profit and loss for the respective income statement line.

Table 4.1 Specification Income/expense from equities and units

Amounts in NOK million 1Q 2017 1Q 2016 2016

Dividends 28 710 27 367 118 584

Realised gain/loss 68 741 8 913 107 005

Unrealised gain/loss 176 713 -203 105 117 224

Income/expense from equities and units before foreign exchange gain/loss 274 164 -166 825 342 813

Table 4.2 Specification Income/expense from bonds


Interest 18 344 16 998 72 573

Realised gain/loss 249 6 755 30 861

Unrealised gain/loss 989 60 725 -3 184

Income/expense from bonds before foreign exchange gain/loss 19 582 84 478 100 250

Table 4.3 Specification Income/expense from financial derivatives


Dividends 20 2 102

Interest -1 345 -19 -2 113

Realised gain/loss -23 -1 063 -3 251

Unrealised gain/loss 2 278 -2 702 2 049

Income/expense from financial derivatives before foreign exchange gain/loss 930 -3 782 -3 213

29


Note 5 Holdings of Equities and units, Bonds and Financial derivatives

Table 5.1 Equities and units

31.03.2017 31.12.2016

Amounts in NOK millionFair value

including dividendsAccrued

dividendsFair value

including dividendsAccrued

dividends

Equities and units 5 058 880 11 275 4 713 907 5 557

Total equities and units 5 058 880 11 275 4 713 907 5 557

Of which equities lent 444 371 340 865

Table 5.2 Bonds

31.03.2017 31.12.2016

Amounts in NOK millionNominal

value

Fair value including

accrued interest

Accrued interest Nominal value

Fair value including

accrued interest

Accrued interest

Government bonds 1 283 617 1 455 508 11 256 1 290 977 1 461 360 11 356

Government-related bonds 324 867 338 745 2 508 319 602 334 137 2 390

Inflation-linked bonds 107 108 130 064 393 114 916 140 814 547

Corporate bonds 603 242 621 687 5 642 573 749 591 146 5 992

Securitised bonds 140 700 134 918 1 094 141 566 147 564 1 478

Total bonds 2 459 534 2 680 922 20 893 2 440 810 2 675 021 21 763

Of which bonds lent 490 192 454 735

Table 5.3 Financial derivatives

31.03.2017 31.12.2016

Amounts in NOK millionNotional amount

Fair valueNotional amount

Fair value

Asset Liability Asset Liability

Foreign exchange derivatives 291 206 1 663 2 337 321 580 4 586 1 995

Interest rate derivatives 29 416 1 065 1 252 31 284 528 2 506

Equity derivatives 8 052 5 599 - 6 645 4 252 -

Total financial derivatives 328 674 8 327 3 589 359 509 9 366 4 501

30


Note 6 Unlisted real estate

Investments in unlisted real estate are made through subsidiaries of Norges Bank, which exclusively constitute investments as part of the management of the GPFG. Subsidiaries presented as Unlisted real estate are designated upon initial recognition as financial instruments at fair value through profit or loss. Changes in fair value for the period are recognised in the income statement and are presented as Income/expense from unlisted real estate.

The fair value of unlisted real estate is determined as the sum of the GPFG’s share of the assets and liabilities in the underlying

subsidiaries, measured at fair value. For further information on fair value measurement of unlisted real estate investments, see note 7 Fair value measurement.

Subsidiaries are financed through equity and long-term debt. Income generated in the real estate subsidiaries may be distributed to the GPFG in the form of interest and dividends as well as repayment of equity and loan financing provided from the GPFG to the subsidiary. There are no significant restrictions on distribution of dividends and interest from the subsidiaries to the GPFG.

Table 6.1 provides a specification of the income statement line Income/Expense from unlisted real estate, before foreign exchange gains and losses.

Table 6.1 Income/expense from unlisted real estate


Dividends received 387 533 2 167

Interest received 360 173 1 490

Unrealised gain/loss 1 928 148 3 285

Income/expense from unlisted real estate before foreign exchange gain/loss 2 675 854 6 942

31


UNDERLYING REAL ESTATE COMPANIESReal estate subsidiaries have investments in other non-consolidated, unlisted companies. These companies in turn invest in real estate assets, primarily properties.

In the tables below, a further specification of Unlisted real estate is provided. Table 6.3 specifies the GPFG’s share of the net income generated in the underlying real estate companies, which is the basis for Income/expense from unlisted real estate presented in

table 6.1. Table 6.4 specifies the GPFG’s share of assets and liabilities in the underlying real estate companies which comprise the closing balance for Unlisted real estate as presented in table 6.2.

The change in the period for the balance sheet line Unlisted real estate is specified in table 6.2.

Table 6.2 Changes in carrying amounts unlisted real estate

Amounts in NOK million 31.03.2017 31.12.2016

Unlisted real estate, opening balance for the period 188 469 180 021

Payments to new investments1 335 19 147

Payments to existing investments1 688 2 808

Payments from existing investments1 -287 -4 686

Unrealised gain/loss 1 928 3 285

Foreign currency translation effect 895 -12 106

Unlisted real estate, closing balance for the period 192 028 188 4691 This represents the net cash flows between the GPFG and subsidiaries presented as Unlisted real estate. The GPFG makes

cash contributions to the subsidiaries in the form of equity and long-term loan financing to fund investments in real estate assets, primarily properties. Net income generated in the subsidiaries may be distributed to the GPFG in the form of repayment of equity and long-term loan financing.

32


Table 6.3 Income from underlying real estate companies


Net rental income1 2 013 1 922 7 645

Realised gain/loss 8 21 109

Fair value changes - properties2 1 322 -151 1 416

Fair value changes - debt2 -188 -332 -191

Transaction costs -16 -18 -411

Interest expense external debt -161 -172 -622

Tax expense payable -12 -28 -151

Change in deferred tax -57 -84 -174

Asset management - fixed fees3 -127 -102 -454

Asset management - variable fees3 -70 -149 -39

Operating costs within the limit from the Ministry of Finance4 -16 -20 -81

Other operating costs -21 -33 -105

Net income underlying real estate companies 2 675 854 6 9421 Net rental income mainly comprises received and earned rental income, less costs relating to the operation and

maintenance of properties.

2 Comprises solely fair value changes of properties and debt and will therefore not reconcile with unrealised gain/loss presented in table 6.1, which includes undistributed profits.

3 Fixed and variable fees to asset managers are directly related to the underlying properties and are primarily linked to the operation and development of properties and leases. Variable fees to external managers are based on achieved performance over time.

4 See table 9.2 for specification of the operating costs that are measured against the management fee limit from the Ministry of Finance.

Table 6.4 Assets and liabilities underlying real estate companies

Amounts in NOK million 31.03.2017 31.12.2016

Deposits in banks 3 113 2 272

Properties 207 632 204 635

External debt -15 889 -15 727

Tax payable -106 -204

Net deferred tax -1 223 -1 153

Net other assets and liabilities -1 499 -1 354

Total assets and liabilities underlying real estate companies 192 028 188 469

33


SIGNIFICANT ESTIMATE Level 3 investments consist of instruments held at fair value that are not traded or quoted in active markets. Fair value is determined using valuation techniques that use models with unobservable inputs. This implies substantial uncertainty regarding the establishment of fair value.

Note 7 Fair value measurement

1. INTRODUCTIONThe fair value of the majority of assets and liabilities is based on official closing prices or observable market quotes. If the market for a security or an asset is not active, fair value is established by using standard valuation techniques.

All assets and liabilities measured at fair value are categorised in the three categories in the

fair value hierarchy presented in table 7.1. The level of valuation uncertainty determines the categorisation.

For an overview of valuation techniques and models, together with definitions and application of the categories of valuation uncertainty, see note 7 Fair value measurement in the annual report 2016.

34


2. FAIR VALUE HIERARCHY

Table 7.1 Investments by level of valuation uncertainty

Amounts in NOK million

Level 1 Level 2 Level 3 Total

31.03.2017 31.12.2016 31.03.2017 31.12.2016 31.03.2017 31.12.2016 31.03.2017 31.12.2016

Equities and units 5 015 031 4 673 199 31 592 28 845 12 257 11 863 5 058 880 4 713 907

Government bonds 1 372 170 1 369 188 83 199 92 172 139 - 1 455 508 1 461 360

Government-related bonds 290 210 279 772 47 676 53 463 859 902 338 745 334 137

Inflation-linked bonds 121 171 124 646 8 893 16 168 - - 130 064 140 814

Corporate bonds 595 040 538 692 26 295 52 293 352 161 621 687 591 146

Securitised bonds 123 291 136 088 11 338 11 149 289 327 134 918 147 564

Total bonds 2 501 882 2 448 386 177 401 225 245 1 639 1 390 2 680 922 2 675 021

Financial derivatives (assets) 1 044 291 7 283 9 075 - - 8 327 9 366

Financial derivatives (liabilities) - - -3 589 -4 501 - - -3 589 -4 501

Total financial derivatives 1 044 291 3 694 4 574 - - 4 738 4 865

Unlisted real estate - - - - 192 028 188 469 192 028 188 469

Other1 - - -69 279 -71 768 - - -69 279 -71 768

Total 7 517 957 7 121 876 143 408 186 896 205 924 201 722 7 867 289 7 510 494

Total (percent) 95.6 94.8 1.8 2.5 2.6 2.7 100.0 100.0 1 Other consists of non-investment assets and liabilities limited to money-market instruments such as secured lending and borrowing

positions, deposits in banks, unsettled trades, posted and received cash collateral and other assets and liabilities.

Valuation uncertainty for the GPFG as a whole at the end of the first quarter of 2017 is virtually unchanged compared to the end of 2016. The majority of the total portfolio has low valuation uncertainty. At the end of the first quarter, 97.4 percent was classified as Level 1 or 2, which is essentially unchanged compared to year-end 2016. Movements between levels in the fair value hierarchy are described in section 3 of this note.

Equities and unitsMeasured as a share of total value, virtually all equities and units (99.2 percent) are valued based on official closing prices from stock exchanges and are classified as Level 1. A few equities and units (0.6 percent) are classified as Level 2. These include equities for which trading has recently been suspended or illiquid securities that are not traded daily. Some holdings (0.2 percent) that are not listed, are illiquid due to lock-in periods, or where trading has been suspended over a prolonged period, have high uncertainty related to fair value and are classified as Level 3.

35


BondsThe majority of bonds (93.3 percent) have observable, executable market quotes and are classified as Level 1. A minority of bonds (6.6 percent) are classified as Level 2. These securities do not have a sufficient amount of executable quotes or they are priced based on comparable but liquid bonds. A few bonds (0.1 percent) that do not have observable quotes are classified as Level 3.

Unlisted real estateAll unlisted real estate investments are classified as Level 3, since models are used to value the underlying assets and liabilities with extensive use of non-observable market inputs. All real estate investments are measured at the value determined by external valuers. Exceptions to this policy are cases of newly acquired properties where the purchase price, excluding transaction costs, is normally

considered to be the best estimate of fair value, or where there are indications that external valuation reports do not reflect fair value so that adjustments to valuations are warranted.

3. MOVEMENTS BETWEEN LEVELS OF VALUATION UNCERTAINTYReclassifications between Level 1 and Level 2There has been no change in the relative share of equities classified as Level 1 or Level 2 during the quarter.

There has been a small decrease in valuation uncertainty for bonds. This is primarily driven by certain corporate bonds denominated in USD being reclassified from Level 2 to Level 1 due to a sufficient amount of observable quotes being available at the end of the first quarter. This confirms a pattern previously observed, whereby some bonds tend to have less liquidity at year-end compared to other quarters.

36


The relative amount of holdings classified as Level 3 is virtually unchanged from year-end 2016. In absolute terms, bond holdings classified as Level 3 have increased by NOK 249 million. This is mainly due to the purchase of a government bond and a bond received as compensation in an acquisition. Both of these

bonds have been classified as Level 3 since the valuation is based on models with considerable use of unobservable inputs. Equities classified as Level 3 have increased by NOK 394 million, mainly due to price appreciation of an equity within this category.

Table 7.2 Changes in Level 3 holdings

Amounts in NOK million 01.01.2017 Purchases Sales

Settle-ments

Net gain/loss

Trans-ferred into

Level 3

Trans-ferred out of Level 3

Foreign ex change gains and

losses 31.03.2017

Equities and units 11 863 1 548 -1 507 20 320 93 -197 117 12 257

Bonds 1 390 317 - -55 -10 - - -3 1 639

Unlisted real estate1 188 469 736 - - 1 928 - - 895 192 028

Total 201 722 2 601 -1 507 -35 2 238 93 -197 1 009 205 924

Amounts in NOK million 01.01.2016 Purchases Sales

Settle-ments

Net gain/loss

Trans-ferred into

Level 3

Trans-ferred out of Level 3

Foreign exchange gains and

losses 31.12.2016

Equities and units 3 607 9 956 -455 -41 -533 257 -842 -86 11 863

Bonds 2 731 - -1 011 -163 -33 6 -91 -49 1 390

Unlisted real estate1 180 021 17 269 - - 3 285 - - -12 106 188 469

Total 186 359 27 225 -1 466 -204 2 719 263 -933 -12 241 201 7221 Purchases represent the net cash flow in the period from the GPFG to subsidiaries presented as Unlisted real estate.

37


4. SENSITIVITY ANALYSIS FOR LEVEL 3 HOLDINGS

Table 7.3 Additional specification Level 3 and sensitivities

Amounts in NOK million

Specification of Level 3 holdings

31.03.2017

Sensitivities 31.03.2017

Specification of Level 3 holdings

31.12.2016

Sensitivities 31.12.2016

Unfavour-able

changes

Favour-able

changes

Unfavour-able

changes

Favour-able

changes

Equities and units 12 257 -2 447 2 447 11 863 -2 638 2 606

Government bonds 139 -14 14 - - -

Government-related bonds 859 -86 86 902 -90 90

Corporate bonds 352 -35 35 161 -16 16

Securitised bonds 289 -29 29 327 -33 33

Total bonds 1 639 -164 164 1 390 -139 139

Unlisted real estate 192 028 -9 861 10 913 188 469 -9 678 10 711

Total 205 924 -12 472 13 524 201 722 -12 455 13 456

There is uncertainty associated with the fair value of holdings classified as Level 3 due to the use of unobservable inputs in the valuation. In the sensitivity analysis presented in table 7.3, reasonably possible alternative assumptions for the key unobservable inputs have been applied. The alternative fair value estimates, given for a favourable and unfavourable outcome, illustrate the sensitivity of the fair value estimates to changes in the key unobservable inputs.

Real estate values are particularly sensitive to changes in yields and assumptions influencing future revenues. In an unfavourable outcome, it is calculated that an increase in the yield of 0.2

percentage point, and a reduction in future market rents of 2 percent will result in a decrease in value of the real estate portfolio of approximately 5.1 percent or NOK 9 861 million. In a favourable outcome, a decrease in the yield of 0.2 percentage point and an increase in future market rents of 2 percent will increase the value of the real estate portfolio by 5.7 percent or NOK 10 913 million.

The sensitivity for bonds classified as Level 3 is essentially unchanged compared to year-end, while the sensitivity for equities classified as Level 3 is slightly reduced.

38


Note 8 Risk

MARKET RISKMarket risk is the risk of changes in the value of the portfolio due to movements in equity prices, interest rates, real estate values, exchange rates and credit spreads. Norges Bank Investment Management measures market risk both for the actual portfolio and the relative market risk for the holdings in the GPFG.

Asset class per country and currencyThe portfolio is invested across several asset classes, countries and currencies as shown in table 8.1.

39


Table 8.1 Allocation by asset class, country and currency

Market value in percent by country and currency1

Market value in percent by asset class

Assets minus liabilities excluding management fee

Asset class Market 31.03.2017 Market 31.12.2016 31.03.2017 31.12.2016 31.03.2017 31.12.2016

Equities Developed 90.1 Developed 90.5

US 37.2 US 37.6

UK 9.5 UK 9.8

Japan 8.9 Japan 9.0

Germany 5.4 Germany 5.4

France 5.1 France 5.2

Total other 24.0 Total other 23.5

Emerging 9.9 Emerging 9.5

China 2.9 China 2.7

Taiwan 1.7 Taiwan 1.5

India 1.1 India 1.0

Brazil 0.8 Brazil 0.8

South Africa 0.6 South Africa 0.6


Total equities 64.59 62.47 5 081 795 4 691 863

Fixed-income Developed 87.2 Developed 87.6

US Dollar 43.2 US Dollar 43.7

Euro 25.6 Euro 25.3

Japanese Yen 6.5 Japanese Yen 5.9

British Pound 3.9 British Pound 4.6

Canadian Dollar 3.0 Canadian Dollar 3.0


Emerging 12.8 Emerging 12.4

Mexican Peso 2.3 Mexican Peso 1.9

South Korean Won 1.8 South Korean

Won 1.7

Indian Rupee 0.9 Indian Rupee 0.9

Polish Zloty 0.9 Polish Zloty 0.8

Indonesian Rupiah 0.9 Brazilian Real 0.8


Total fixed-income 32.95 34.31 2 591 948 2 576 875

Unlisted real estate US 49.6 US 46.0

UK 22.9 UK 23.0

France 14.9 France 14.6

Switzerland 4.5 Germany 7.6

Germany 3.3 Switzerland 3.6


Total unlisted real estate2 2.46 3.22 193 546 241 7561 Market value in percent by country and currency includes derivatives and cash.2 Listed real estate investments are presented as Equities from 01.01.2017. These were previously included in the asset class Real estate.

Comparatives have not been restated.

40


At the end of the first quarter, the share of equities in the fund was 64.6 percent. This is an increase from 62.5 percent at year-end 2016. The bond portfolio’s share of the fund decreased to 32.9 percent in the first quarter, from 34.3 percent at year-end. The year-to-date change in asset class allocation was mainly a result of stronger returns for equities than bonds, as well as the transfer of the listed real estate to the equity portfolio at the start of the year as a result of a mandate change. Emerging markets had a stronger year-to-date return than developed markets, as both equity markets increased and currencies strengthened. This has led to an increase in the share of both equities and bonds invested in emerging markets.

Volatility Risk models are used to quantify the risk of changes in values associated with all or parts of the portfolio. One of the risk measures is expected volatility. Tables 8.2 and 8.3 present risk both in terms of the portfolio’s absolute risk and in terms of the relative risk.

The mandate set by the Ministry of Finance was amended with effect from 1 January 2017. All the fund’s investments, including unlisted real estate, are now included in the calculation of expected relative volatility, and measured against the fund’s benchmark index which comprises global equity and bond indices. The limit for expected relative volatility for the fund, now including unlisted real estate, is still 1.25 percentage points.

MSCI’s Barra Private Real Estate 2 (PRE2) model is used to calculate risk for the fund’s unlisted real estate investments. The model consolidates information from global listed and unlisted real estate markets to compose a risk profile for unlisted real estate investments, based on location and type of real estate.

The overall method applied in the calculations of expected absolute and relative volatility is explained in note 8 Risk in the annual report 2016. This method is also applied to investments in unlisted real estate.

Table 8.2 Portfolio, expected volatility, in percent

Expected volatility, actual portfolio

31.03.2017 Min 2017 Max 2017Average

2017 31.12.2016 Min 2016 Max 2016Average

2016

Portfolio 10.9 10.7 10.9 10.8 10.6 10.2 10.7 10.5

Equities 14.0 13.9 14.0 14.0 14.0 12.9 14.1 13.7

Fixed-income 9.7 9.7 9.8 9.7 9.7 9.6 10.3 10.0

Unlisted real esate1 12.6 12.6 12.7 12.61 The risk for the fund’s unlisted real estate investments has been calculated separately from 2017.

41


Risk measured in terms of expected volatility shows an expected annual change in value in the fund of 10.9 percent, or approximately NOK 860 billion at the end of the quarter, compared to 10.6 percent at year-end 2016. Expected volatility for both the equity portfolio and the bond portfolio is unchanged since year-end, at 14.0 percent and 9.7 percent, respectively. The increase in the fund’s expected volatility in the first quarter is mainly due to an increased weight of equities in the portfolio.

The fund’s expected relative volatility, including unlisted real estate, was 32 basis points at the end of the first quarter, compared to 34 basis points at year-end 2016.

Expected shortfall is a tail risk measure that measures the expected loss of a portfolio in extreme market situations. The expected shortfall measure provides an estimate of the annualised expected loss for a given confidence level. By means of historical simulations, relative returns of the current portfolio and

benchmark are calculated on a weekly basis over the last ten years. The average relative return measured in the currency basket for the 2.5 percent worst weeks is then annualised, giving the expected shortfall measured at a 97.5 percent confidence level.

With effect from 1 January 2017, investments in unlisted real estate are also included in the calculation of expected shortfall for the fund. The Executive Board has determined that the annual shortfall shall not exceed 3.75 percentage points. At the end of the first quarter, the measure was 1.36 percentage points.

CREDIT RISKCredit risk is the risk of losses from issuers of fixed-income instruments defaulting on their payment obligations. Credit risk in the bond portfolio is monitored among other things through the use of credit ratings. Table 8.4 shows the bond portfolio’s distribution across different credit rating categories.

Table 8.3 Relative risk measured against the benchmark indices of the fund and asset classes, expected relative volatility, in basis points

Expected relative volatility

31.03.2017 Min 2017 Max 2017Average

2017 31.12.2016 Min 2016 Max 2016Average

2016

Portfolio1 32 31 35 32 34 - - -

Equity and fixed-income portfolio1

- - - - 28 26 29 28

Equities 38 36 40 37 37 34 38 36

Fixed-income 45 41 45 43 44 41 55 51 1 In the new investment management mandate, effective from 2017, real estate is included in the framework for relative

volatility. Prior to 2017, the framework in the investment management mandate was based on the aggregated equity- and fixed-income portfolio.42


Table 8.4 Bond portfolio specified by credit rating

Amounts in NOK million, 31.03.2017 AAA AA A BBB

Lower rating Total

Government bonds 692 185 226 085 312 902 183 423 40 913 1 455 508


Inflation-linked bonds 100 649 11 176 3 611 10 890 3 738 130 064

Corporate bonds 6 303 65 130 221 186 318 715 10 353 621 687

Securitised bonds 118 199 13 543 1 542 1 634 - 134 918

Total bonds 1 059 956 456 153 578 215 529 767 56 831 2 680 922

Amounts in NOK million, 31.12.2016 AAA AA A BBB

Lower rating Total

Government bonds 716 767 260 859 271 238 173 321 39 176 1 461 360


Inflation-linked bonds 109 025 9 493 3 662 12 459 6 175 140 814

Corporate bonds 5 290 59 469 219 333 297 198 9 856 591 146

Securitised bonds 126 001 16 054 2 010 3 499 - 147 564

Total bonds 1 100 361 482 424 532 559 502 058 57 620 2 675 021

The proportion of bond holdings categorised with a credit rating A increased to 21.6 percent at the end of the first quarter, compared to 19.9 percent at year-end 2016. This is largely caused by an increase in Japanese government bonds. Further, bonds with credit rating AAA were reduced to 39.5 percent of the portfolio at the end of the first quarter, from 41.1 percent at year-end, mainly as a result of reduced

exposure in government bonds in this category. The overall credit quality of the bond portfolio has slightly declined since year-end.

COUNTERPARTY RISKCounterparty risk is the risk of loss due to counterparty bankruptcy or other events leading to counterparties defaulting.

43


Counterparty risk as measured both in terms of gross and net risk exposure has increased since year-end 2016. The net exposure was NOK 116.7 billion at the end of the first quarter, compared with NOK 113.1 billion kroner at year-

end. The increase is largely due to greater risk exposure from securities lending and repurchase and reverse repurchase agreements.

Table 8.5 shows counterparty risk by type of position as at 31 March 2017, aggregated for the GPFG.

Table 8.5 Counterparty risk by type of position

Amounts in NOK million, 31.03.2017 Gross exposureEffect of

nettingCollateral and

guarantees Net exposure

Securities lending 70 106 - 1 141 68 965

Unsecured bank deposits1 18 839 - - 18 839

OTC derivatives including foreign exchange contracts 16 871 4 783 215 11 873

Cleared OTC and listed derivatives2 8 893 1 463 -104 7 534

Participatory certificates 4 553 - - 4 553

Repurchase and reverse repurchase agreements 5 189 696 -96 4 589

Settlement risk towards broker and long settlement transactions 368 - - 368

Total 124 819 6 942 1 156 116 721

Amounts in NOK million, 31.12.2016 Gross exposureEffect of

nettingCollateral and

guarantees Net exposure

Securities lending 64 908 - 868 64 040

Unsecured bank deposits1 20 570 - - 20 570

OTC derivatives including foreign exchange contracts 19 347 3 667 2 608 13 071

Cleared OTC and listed derivatives2 8 003 1 183 -1 685 8 505

Participatory certificates 3 934 - - 3 934

Repurchase and reverse repurchase agreements 3 523 492 149 2 882

Settlement risk towards broker and long settlement transactions 50 - - 50

Total 120 335 5 342 1 940 113 054 1 Includes bank deposits in non-consolidated real estate subsidiaries.2 Relates to futures trades and interest rate swaps cleared by a central clearing counterparty.

44


MANAGEMENT COSTS IN SUBSIDIARIESManagement costs incurred in subsidiaries consist of operating costs related to the management of the unlisted real estate portfolio. Management costs incurred in non-

consolidated and consolidated subsidiaries are presented in the income statement as Income/expense from unlisted real estate and Other costs, respectively. These costs are specified in table 9.2.

Table 9.1 Management fee

Amounts in NOK million 1Q 2017Basis

points 1Q 2016Basis

points 2016Basis

points

Salary, social security and other personnel related costs 333 269 1 177

Custody costs 99 91 379

IT services, systems, data and information 154 154 649

Research, consulting and legal fees 32 57 261

Other costs 64 57 244

Allocated costs Norges Bank 43 41 161

Base fees to external managers 209 170 638

Management fee excluding performance-based fees 934 5.0 839 4.7 3 509 4.9

Performance-based fees to external managers 243 -87 222

Total management fee 1 177 6.3 752 4.2 3 731 5.2

Note 9 Management costs

The GPFG is managed by Norges Bank. Costs relating to the management of the fund are mainly incurred in Norges Bank. Management costs are also incurred in subsidiaries of Norges Bank exclusively established as part of the management of the GPFG’s investments in unlisted real estate.

MANAGEMENT COSTS IN NORGES BANKThe Ministry of Finance reimburses Norges Bank for costs incurred in connection with the management of the GPFG, in the form of a management fee. The management fee is equivalent to the actual costs incurred by Norges Bank, including performance-based fees to external managers, and is expensed in the income statement line Management fee. Costs included in the management fee are specified in table 9.1. 45


Table 9.2 Management costs, real estate subsidiaries


Salary, social security and other personnel related costs 6 5 27

IT services, systems, data and information 8 9 36

Research, consulting and legal fees 3 6 19

Other costs 4 4 18

Total management costs, real estate subsidiaries 21 24 100

Of which management costs non-consolidated subsidiaries 16 20 81

Of which management costs consolidated subsidiaries 5 4 19

In addition to the management costs presented in table 9.2, operating costs are also incurred in subsidiaries related to the ongoing maintenance, operation and development of properties and leases. These costs are not defined as management costs, since they are directly related to the underlying properties, and are not part of the management of the real estate portfolio. Other operating costs incurred in non-consolidated companies are expensed directly in the portfolio result and are presented in the income statement line Income/expense from unlisted real estate. See table 6.3 in note 6 Unlisted real estate for further information. Other operating costs incurred in consolidated subsidiaries are expensed in the income statement line Other costs.

UPPER LIMIT FOR REIMBURSEMENT OF MANAGEMENT COSTSThe Ministry of Finance has established an upper limit for the reimbursement of management costs. For 2017, the sum of total management costs incurred in Norges Bank and its subsidiaries, excluding performance-based fees to external managers, is limited to

7.5 basis points of average assets under management. In accordance with guidelines from the Ministry of Finance, the calculation of average assets under management is based on the market value of the portfolio in Norwegian kroner at the start of each month in the calendar year. Other operating costs incurred in subsidiaries, as well as costs incurred in partly-owned real estate entities, are not included in the costs that are measured against this limit. Total management costs that are measured against the limit amount to NOK 955 million in the first quarter of 2017. This consists of management costs of NOK 934 million in Norges Bank, excluding performance-based fees to external managers, and management costs of NOK 21 million in subsidiaries. This corresponds to 5.1 basis points of assets under management on an annual basis.

Total management costs including performance-based fees amount to NOK 1 198 million in the first quarter of 2017. This corresponds to 6.4 basis points of assets under management on an annual basis.

46


To the Supervisory Council of Norges Bank

Report on review of interim financial information

IntroductionWe have reviewed the financial reporting for the investment portfolio of the Government Pension Fund Global. Subsidiaries of Norges Bank that exclusively constitute investments as part of the management of the investment portfolio are included in the financial reporting. The financial reporting comprises the balance sheet as at 31 March 2017, the income statement, the statement of changes in owner’s capital, the statement of cash flows for the three-month period then ended and selected explanatory notes. The Executive Board and management are responsible for the preparation and presentation of this interim financial information in accordance with International Accounting Standard 34 “Interim Financial Reporting” as adopted by the EU. Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of reviewWe conducted our review in accordance with International Standard on Review Engagements 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity”. A review of interim financial information consists of making inquiries, primarily to persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with international standards on auditing, and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

ConclusionBased on our review, nothing has come to our attention that causes us to believe that the interim financial information is not prepared, in all material respects, in accordance with International Accounting Standard 34 “Interim Financial Reporting” as adopted by the EU.

Oslo, 26 April 2017Deloitte AS

Henrik WoxholtState Authorised Public Accountant (Norway)

Translation from the original Norwegian version

47


http://www.norges-bank.no/en/about/organisation/executive-board/

NORGES BANK INVESTMENT MANAGEMENTBankplassen 2, P.O. Box 1179 Sentrum, NO-0107 Oslo,Norway

T: +47 24 07 30 00, www.nbim.no

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